Credit Scores Affect Car Insurance Premiums

Credit scores affect car insurance premiums more substantially than many car owners realize. There are a number of factors involved in the determination of your auto insurance premiums, and your credit is only one of them. But credit in itself is a large and very important factor taken into account by insurance providers when their underwriters sit down to determine pricing and program eligibility. Credit-based auto insurance scoring is in use across the industry, even as consumer groups and lawmakers seek to end the practice. While there may come a time when your credit is no longer a determining factor in the setting of your car insurance rates, for now the best you can do with this piece of information is work to improve your credit score. In the meantime, there are options for dealing with credit problems as they pertain to auto insurance coverage.

Credit-Based Auto Insurance Scoring

Credit-based auto insurance scoring has been in use by the auto industry for a number of years. Every major provider uses this method in some way as they work to determine rates and eligibility for coverage on behalf of their customers. It certainly does not exist in a vacuum, and providers use it as only one tool among many to calculate rates and evaluate each potential customer in insurance terms. Credit-based auto insurance scoring has come into wide use in large part because it does an adequate job as an indirect method of assessment in predicting risk as it pertains to taking on customers for auto insurance plans.

In the absence of direct methods like monitoring customers and observing their actual driving behavior (which would be both expensive and a likely illegal and unethical invasion of privacy), auto insurance carriers have been forced to come up with indirect methods of predicting their own risk when they choose to take on certain customers for auto insurance policies. To this end, the insurance industry has extensively studied connections between actual driving performance and any number of other statistical properties-among them age, gender, marital status, and yes, credit scores.

The industry has spent millions on research looking into the correlation between the driving behaviors of groups and their credit histories, and the results of this research has unquestionably yielded a positive and strong correlation between credit history and performance behind the wheel. Specifically, drivers who have high credit scores are more likely to avoid accidents and other claims, while drivers wit lower scores are more likely to get into accidents and have more expensive and more frequent claims on their policies. Through this indirect method of assessment of the larger population of drivers, industry researchers feel comfortable predicting similar behavior patterns in individual drivers.

Of course, not everyone is so comfortable with this method, and there is a strong undercurrent of resistance at this time to the industry standard of credit-based insurance scoring as a risk assessment tool for underwriters to use. But as of yet, critics have been unable to get much headway, although there are bills in progress in several state legislatures. In the past, such bills have failed to pass, but this is not to say the same will happen in the future.

How to Improve Your Credit

Regardless of what happens down the line, as drivers and car insurance policy holders, we have to make choices based on what's happening right now. And in the current state of the industry, auto insurance companies do heavily rely on credit-based scoring to set our rates for policies. With this in mind, we have no choice as consumers but to focus our attention on what we can do as individuals to improve our own candidacy for inexpensive policies in light of these current standards.

Doing so means working on your credit score to improve it, and thus improve your chances of getting into a preferred auto insurance policy. There are many ways to improve your credit, but the best approach is probably to work to change what you can for immediate help while making choices to improve your long-term credit profile down the road.

To begin with, obtain a copy of your credit report. If there are any mistakes or inconsistencies, find out what it will take to have them corrected. A simple mistake or misunderstanding might be costing you all kinds of money in bank loans, auto insurance, and who knows what other areas of your financial life. Next, look at any accounts that show delinquency. If you are past due or in collections on any of your installment loans or any other accounts, get up to date on them as soon as possible. Simply removing these marks from your credit report can make a big difference.

Third, look at any long-range patterns that might emerge from the report. If you show a history of late payments on car loans, for example, make it a point to correct this tendency in the future. Once you realize the impact these sorts of consumer behaviors can have on your credit score, and the long-ranging influence that score has on your life, you will want to make changes in these patterns to improve your future outlook. Marks on your credit do stay around for awhile, but if you begin to show a new responsibility toward taking care of your financial obligations, you can explain that change to decision makers in the future to help you overcome some of the things that might still appear on your report. Underwriters and others are interested in patterns as well as hard numbers; if you are showing a consistent pattern toward improving your credit score and taking care of your obligations, you will win some deference in regard to your overall score while it is still improving.

Auto Insurance Without Credit Scores

In the meantime, it may be apparent that your credit situation is totally preventing you from obtaining affordable auto insurance coverage of any kind. If this is the case, if your credit situation is bad enough to outweigh a good driving record, you might have to opt for a no credit check auto insurance option. Not every provider offers this choice, but there are some specialists who cater to those who might have a strong insurance profile overall when credit is not taken into account. Of course, it must be noted that auto insurance without credit scores will likely still cost you more than a standard policy. But it may save you money over getting into a plan through a provider who checks your credit.

As a general rule, car insurance premiums are greatly affected by credit scores. A strong score can help you to save money and qualify for preferred policies when couple with a good driving record. A poor credit score, on the other hand, often disqualifies you from traditional plans and forces you to seek out other options for car insurance. It is important to understand the great effect your credit can have on your ability to obtain affordable car insurance. Take the time to read up on credit-based scoring, and do some research on how to improve your own credit scores to save money on car insurance.